GAO-03-26R Postal Financial Reporting

November 13, 2002

The Honorable Daniel K. Akaka

Chairman

The Honorable Thad Cochran

Ranking Minority Member

Subcommittee on International Security,

 Proliferation, and Federal Services

Committee on Governmental Affairs

United States Senate

Subject: U.S. Postal Service Actions to Improve Its Financial Reporting

Given the vital role of the nation’s postal system and the importance of its financial

viability, it is imperative that the U.S. Postal Service (the Service), the Congress,

stakeholders, and the public have adequate information available to them to understand

the Service’s financial situation and assess its progress towards meeting its performance

goals and planning for its future. During the first part of fiscal year 2001, the Service

made numerous revisions to its estimated net income with little or no public explanation.

The Service’s financial outlook changed from a $480 million deficit in its fiscal year 2001

budget approved in November of 2000, to a $2 billion to $3 billion deficit projected 3

months later in February 2001. Likewise, at the beginning of fiscal year 2002, the Service

estimated that it would end the year with a $1.35 billion deficit and then stated, in May

2002, that its net loss for the year could have reached $4.5 billion. Despite the fact that

the Service publicly released periodic financial information, these significant changes in

financial outlook were not evident from publicly available information and came as a

surprise to many stakeholders. More recently, the Service announced the results of a

new financial analysis that could significantly reduce its Civil Service Retirement System

(CSRS) pension liability if Congress takes related legislative action, which would

significantly impact the Service’s financial outlook.1

 It will be important for the Service to

keep stakeholders well informed about this issue.

Over the past 2 years, we have been raising concerns and have made recommendations

regarding the lack of sufficient and timely periodic information on the Service’s financial

condition and outlook available to the public between publications of its audited yearend financial statements. This report responds to your July 31, 2002, request that we

provide periodic updates on several key areas related to the Service’s financial outlook,

 

1

In May 2002, we asked the Office of Personnel Management (OPM) to, among other things, estimate how

much of the underfunded CSRS pension liability is attributable to the Service. OPM’s projections indicate

that the Service’s future payments required under current legislation would overfund the CSRS liability by

$71 billion over the remaining benefit period. Legislation would be required to modify the existing funding

method so as to prevent overfunding of benefits in the future.

United States General Accounting Office

Washington, DC 20548
2 GAO-03-26R Postal Financial Reporting

including improvements in financial and performance reporting. Specifically, this report

discusses the actions taken by the Service to address our past recommendations to

provide sufficient, more timely, and accessible financial reports as well as our

assessment of the Service’s responses. Our specific recommendations and the Service’s

initial responses were as follows:

• In April 2001, we recommended that the Service provide summary financial

reports to Congress and the public on a quarterly basis. These quarterly reports

were to present sufficiently detailed information for stakeholders to understand

the Service’s current and projected financial condition, how its outlook may have

changed since the previous quarter, and its progress towards achieving its desired

results.2 In a letter dated June 2001 to congressional oversight and appropriation

committees and subcommittees, the Service agreed to provide additional

transparency related to its financial condition and said that it would create, and

post to its Web site, financial statements “similar to what publicly traded

enterprises provide” and continue this practice quarterly.

• In February 2002, we recommended that the Service provide its monthly and

quarterly financial reports on its Web site in a user-friendly format and in a

timelier manner.3

 In its February 2002 comments on a draft of our report, the

Service agreed with our recommendation and said it was providing financial

reports on its Web site in a more timely and user-friendly manner.

• In September 2002, we reported that the Service should carefully reassess its

overall accounting treatment for pension and postretirement health obligations

and reaffirmed a recommendation that we previously made to the Service to

enhance disclosure of its postretirement health benefit obligations in its financial

statements. In its September 10 letter commenting on the report, the Service

stated that it planned to address its pension and postretirement health obligations

in the Management Discussion and Analysis (MD&A) section of its annual report.4

This report on the Service’s financial reporting is based on our previous work, review of

the Service’s monthly and quarterly financial reports from the third quarter of fiscal year

2001 through the third quarter of fiscal year 2002, the Service’s written responses to our

recommendations, and discussions with Service officials about their responses to our

recommendations.

We compared the Service’s quarterly financial report for the third quarter ending in May

2002, with those of a similar period completed by two of its major publicly traded

competitors—FedEx and United Parcel Service (UPS). Publicly traded companies are

 

2

U.S. General Accounting Office, U.S. Postal Service: Transformation Challenges Present Significant

Risks, GAO-01-598T (Washington, D.C.: Apr. 4, 2001). 3

 U.S. General Accounting Office, U.S. Postal Service: Deteriorating Financial Outlook Increases Need for

Transformation, GAO-02-355 (Washington, D.C.: Feb. 28, 2002). 4

U.S. General Accounting Office, U.S. Postal Service: Accounting for Postretirement Benefits, GAO-02-

916R (Washington, D.C.: Sept. 12, 2002).
3 GAO-03-26R Postal Financial Reporting

subject to Securities and Exchange Commission (SEC) quarterly financial reporting

requirements.5 These quarterly reports include three major components: (1) financial

statements, which consist of an income statement, balance sheet, cash flow statement,

and related footnotes; (2) management’s discussion and analysis (MD&A) of financial

condition and results of operations; and (3) quantitative and qualitative disclosures about

market risk.6

 The SEC requires that information in quarterly reports from publicly traded

entities provide investors and others with an accurate understanding of the company’s

current and prospective financial position and operating results. Although the Service is

not subject to SEC reporting requirements, the purpose of these requirements is similar

to the intent of our recommendations for improved transparency to enable stakeholders

to better understand the Service’s financial condition and outlook.

We conducted our review between July 2002 and September 2002 in accordance with

generally accepted government auditing standards. We requested comments on a draft of

this report from the Postal Service, and its comments are discussed near the end of this

letter and are reproduced in enclosure IV.

Results In Brief

Transparency is particularly important because the Service is the hub of a $900 billion

mailing industry and is a vital part of the nation’s communications network. Its recent

financial difficulties have accentuated the need for stakeholders—including the

Congress, Postal Rate Commission (PRC), and mailers—to be well apprised of the

Service’s financial situation and understand how future operating results may be affected

by impending events. Further, we recently reported that the Service’s financial situation

is significantly impacted by its pension and postretirement health obligations and that

the Service should reassess its accounting treatment and reporting of these obligations.

We also reaffirmed our previous recommendation that the Service disclose the full

amount of the accrued postretirement health benefits earned by its employees and

retirees in notes to its financial statements. The importance of these obligations was

recently highlighted when the Service announced the results of a new analysis that could

significantly reduce its CSRS pension liabilities if Congress takes related legislative

action. This change would improve its overall financial condition and provide

opportunities to address other key financial issues, such as its postretirement health

benefit obligations and outstanding debt.

Although the Service has traditionally provided a range of detailed financial and

operating data to stakeholders throughout the fiscal year, its periodic financial reports

have not clearly explained changes in its financial condition, results of operations, and

outlook and have not always been readily available to the public. In response to our

recommendations, the Service committed to provide quarterly financial statements

“similar to what publicly traded enterprises provide.” The Service also has begun posting

its quarterly reports on mail volumes and revenues, along with its monthly operating

statements, to its Web site. However, we do not believe that the quarterly financial

 

5

See 17 C.F.R. §240.13a-13.

6

Such risks are typically associated with derivative instruments utilized to hedge changing market

conditions and may not be applicable to activities of the Service.
4 GAO-03-26R Postal Financial Reporting

reports provided to date meet the intent of our recommendations, because the Service

provided only limited analysis and explanations to help stakeholders understand what

had changed, why it had changed, and how these changes affected the Service’s current

financial situation and expected outlook.

The SEC requires that quarterly reports submitted by publicly traded companies include

a discussion of material changes in a company’s financial condition and results of

operations.7 This type of discussion is consistent with the intent of our

recommendations. When we compared the Service’s most recent quarterly report with

those of two of its publicly traded competitors—FedEx and UPS—we found that the

Service’s quarterly report generally provided the same basic financial statements as did

its competitors. However, unlike the Service, FedEx and UPS also provided very

detailed “Management’s Discussion and Analysis” sections in their reports that discussed

events during the period that may have had a significant impact on the financial

condition of the company and the outlook for the future, and compared the results of

operations with the prior year’s results. FedEx and UPS’s reports also included

explanatory footnotes to the financial statements that provided details about significant

changes that have occurred and material contingencies that were not included in the

Service’s reports. Further, the Service’s quarterly reports were not consistent in format

and content, or as available to the public as the FedEx and UPS quarterly reports. These

changes in subsequent quarterly reports and their limited availability made it difficult to

make comparisons and analyze trends.

In commenting on our draft report, the Service said that it would provide additional

information in its periodic financial reports to improve stakeholder understanding of its

business and that it would retain the data placed on its Web site for 3 years. The Service

also cautioned that public discussion of retirement obligations must be undertaken with

great care, and that it would ensure greater public understanding in this area. Due to the

magnitude of these costs, the potential effects on current and future ratepayers, and the

complexity of the issues involved in reporting retirement-related obligations, we agree

that greater public understanding of these obligations is important and that the Service

can help accomplish this through enhanced disclosure in its financial and related

statements. The Service also said that it makes more financial and operating information

available than we reflected in our report. We discuss this issue near the end of this letter.

Background

Traditionally, between the annual issuance of its audited year-end financial statements,

the Service has provided several types of periodic financial reports, including its monthly

Financial and Operating Statements; quarterly Revenue, Piece, and Weight (RPW)

Reports; and most recently, quarterly financial reports.8

 The information provided in its

periodic monthly operating statements and quarterly RPW reports is as follows:

 

7

See 17 C.F.R. §229.303 (b)(2002).

8

The Service uses a 52-week “postal fiscal year” for management purposes that contains 364 days and thus

starts and ends on a different day each postal fiscal year. The Service divides each postal fiscal year into

13 accounting periods of 4 weeks each. The first postal quarter corresponds to the first three accounting

periods, and the last postal quarter includes the last four accounting periods of the postal fiscal year.
5 GAO-03-26R Postal Financial Reporting

• Monthly Financial and Operating Statements: Cover a 4-week period and include

data that provide an overview of financial results for that period, compare results

with the budget, compare results with the same period in the previous year, and

provide year-to-date information. These statements also include detailed

information on revenues, expenses, volumes, and work hours; a balance sheet; a

cash flow statement; and capital commitments and outlays. Traditionally, these

reports were sent to stakeholders by request or posted on the PRC’s Web site.

The Service began posting the most recently completed financial and operating

statement to its Web site in early 2002.

• Quarterly Revenue, Piece, and Weight Reports: Contain information relating to the

Service’s mail classes and special services. RPW reports document the total

revenue, pieces, and weights for each mail class, subclass, and service for that

quarter; in addition, the reports provide data on the amount and percentage

change from the same period in the previous year and year-to-date information.

Quarterly RPW reports dating back to fiscal year 1999 are currently available on

the Service’s Web site.

During the fall of 2001, when the Service experienced sharp declines in its mail volumes

and revenues, and it requested additional appropriations from Congress, readily available

and detailed information on the Service’s changing financial situation was scarce. Our

February 2002 report noted that from October 2001 to mid-January 2002, the Service did

not publicly release its monthly statements for the last accounting period of fiscal year

2001 and for the first three accounting periods of fiscal year 2002. 9 Although the Service

issued its annual report for fiscal year 2001 in December 2001, it did not publicly release

financial results for the fourth quarter of fiscal year 2001.10 We reported that more timely

availability of monthly and quarterly reports, even if they contain preliminary data

subject to revision, would be useful to improve transparency for congressional oversight,

the stakeholder community, and the public.11

The Service’s Quarterly Financial Reports Lacked Explanatory Information,

Consistency, and Public Availability

Much attention has recently been focused on efforts to improve accountability and the

usefulness of financial information, in both the public and private sectors. One of the key

components of the President’s Management Agenda is to improve accountability to the

American people by enhancing the timeliness, usefulness, and reliability of financial

information provided by federal agencies. Likewise, recently enacted legislation—the

Sarbanes-Oxley Act of 2002 (Public Law 107-204, enacted into law on July 30, 2002)—

seeks to protect investors by improving the accuracy and reliability of corporate

 

9

GAO-02-355. 10The Service has a long-standing practice of withholding detailed financial information on the fourth

quarter of a fiscal year and the first accounting periods of the following fiscal year until its annual financial

statements have been audited and approved by the Board of Governors. The board approved the Service’s

audited financial statements for fiscal year 2001 in December 2001.

11GAO-02-355, pp. 44-45.
6 GAO-03-26R Postal Financial Reporting

disclosures made pursuant to the securities laws. Given the importance of the Service’s

financial condition and outlook, timely, accurate, and complete financial information is

needed for oversight purposes and for stakeholders to better understand the Service’s

changing financial situation and its potential effect on stakeholders’ future plans.

The key limitations of the Service’s quarterly financial reports were that they have lacked

sufficient analysis and explanation of what has changed and why in its financial

condition, operating results, and outlook. This type of explanatory information is

typically provided in quarterly financial reports of publicly traded companies and is

consistent with the intent of our previous recommendations. Further, the Service’s

quarterly reports have not been consistent in format and content or readily available to

the public. Sufficient, consistent, and accessible financial information helps provide the

necessary transparency and accountability that are fundamental principles in ensuring

public confidence in an organization and proper oversight.

The Service’s Quarterly Financial Reports Lacked Sufficient Analysis and Explanations

When we compared the most recent quarterly reports of the Service with those of its

publicly traded competitors—FedEx and UPS—we found that the greatest differences

were in the level of analysis and explanation provided for changes in financial condition,

operating results, and outlook. 12 This information is generally included in the sections

titled MD&A in the publicly traded quarterly reports and in the notes to the financial

statements.

Management’s Discussion and Analysis (MD&A)

The SEC requires publicly traded enterprises to provide a management’s discussion and

analysis of the entities’ financial condition and results of operations, both in quarterly

and annual reports. The SEC guidance for interim financial reports states:

“the MD&A requirements are intended to provide in one section of a filing, material historical and

prospective textual disclosure enabling investors and other users to assess the financial condition

and results of operations of the registrant, with particular emphasis on the registrant’s prospects

for the future . . .. Disclosure is mandatory where there is a known trend or uncertainty that is

reasonably likely to have a material effect on the registrant’s financial condition or results of

operations. Accordingly, the development of an MD&A should begin with management’s

identification and evaluation of what information, including the potential effects of known trends,

commitments, events, and uncertainties, is important to providing investors and others an

accurate understanding of the company’s current and prospective financial position and operating

results.”13

 

12Our comparisons were based on the most recent publicly available quarterly reports by the Postal

Service, FedEx, and UPS, which covered different periods. The Postal Service’s third quarter report for

fiscal year 2002 covered the period February 23-May 17, 2002, and was made publicly available in July 2002.

FedEx’s third quarter report for fiscal year 2002 covered the period December 1, 2000–February 28, 2002,

and was filed with the SEC in April 2002. UPS’s first quarter report for fiscal year 2002 covered the period

January 1, 2002–March 31, 2002, and was filed with the SEC in May 2002.

13See SEC Rel. Nos. 33-8056; 34-45321; FR-61 (Jan. 22, 2002).
7 GAO-03-26R Postal Financial Reporting

In comparing the most recent quarterly reports of the Service, FedEx, and UPS, we found

that the most notable differences were in the level of detail provided in the MD&A

sections of the reports.14 For example, FedEx and UPS provided explanations in their

MD&A sections of how they planned to meet their working capital needs for the future;

causes of changes in revenues and volume, by business line, compared with prior

periods; and their outlook for the future, including the effect of significant events, such

as the terrorist-related events of the fall of 2001. In contrast, the Service provided

minimal explanations in these areas. Given the potential impact of these and other key

factors, such as the timing and amount of proposed rate increases, it would be helpful to

know how these factors affect the Service’s changing year-end outlook. Specific

examples of the differences between the MD&A section of the Service’s quarterly report

and those in FedEx’s and UPS’s quarterly reports are provided below. The full text of the

quarterly reports we compared can be found in enclosure I for the Service, enclosure II

for FedEx, and enclosure III for UPS.

• Postal Service discussion of outlook:

“Volume trends of the past three quarters are expected to continue through the fiscal year end in

September. Taking the June 30, 2002 rate increase into account, volume losses in the 3 to 4 percent

range are anticipated for the quarter, compared to the same quarter last year.

With expense reductions in excess of $2.5 billion and the rate increase on June 30, the estimated

net loss for the year will be in the range $1.0 billion to $1.5 billion.”

• FedEx discussion of outlook:

“While we believe there is evidence that a modest economic recovery is underway, a significant

portion of our U.S. domestic express business comes from the manufacturing and wholesale

sectors, especially in the high technology area. Recovery in these sectors is still lagging the rest of

the economy on a year-over-year basis. Until these key sectors experience sustained growth,

volumes at FedEx Express are expected to remain soft.

“Our fourth quarter volume outlook for FedEx Express is for U.S. domestic average daily package

volume to be approximately 2% below last year’s fourth quarter and for IP shipments to be down

about 1%. In addition, our dynamic fuel surcharge at FedEx Express effectively has a six-week lag

before the surcharge is adjusted for increased fuel prices. Therefore, our operating income may be

negatively affected should the spot price of jet fuel increase significantly in the fourth quarter. At

FedEx Ground, fourth quarter volume is expected to grow about 16% year-over-year.

“We believe our diverse portfolio of services is the key factor to our long-term growth. The

expansion of our Home Delivery network and continued development and cross selling of the

diverse FedEx portfolio of services, particularly to small- and medium-sized businesses, is central

to our strategy. Our website, fedex.com, is heavily utilized and has helped us reduce costs and

improve customer satisfaction. We believe that our substantially fixed cost express network

infrastructure will allow us to realize incremental profits when the economy recovers.

“Maintenance costs during the fourth quarter of 2002 are expected to be higher due to scheduled

maintenance activities. Also, we accrued increased variable compensation in the third quarter of

2002 and expect to continue to do so in the fourth quarter. Our 2002 incentive compensation costs

 

14The Service did not have a section titled Management’s Discussion and Analysis in its quarterly report,

but it did have similar sections titled “Operating Results” and “Message from the Chief Financial Officer.”

In our analysis, we compared these sections with the MD&A sections of FedEx and UPS quarterly reports.
8 GAO-03-26R Postal Financial Reporting

will be sharply reduced for most employees (including senior management). However, fourth

quarter incentive compensation provisions will be higher year-over-year since the prior year’s

fourth quarter included reversals of incentive compensation that had been previously accrued.

“We expect pension and health care costs to continue to increase over the near term. Our net

pension cost for 2002 will increase by approximately $90 million due to lower interest rates and a

reduction in the value of plan assets. We expect next year’s pension cost to increase by $90-100

million based on a continued decline in interest rates and a decrease in the expected return on

pension plan assets. While employee retirement costs continue to rise, our retirement programs

are well funded, with assets more than sufficient to meet our current obligations.”

• UPS excerpts of significant events and outlook:

“... Due to the events of September 11, 2001, increased security requirements for air carriers may

be forthcoming; however, we do not anticipate that such measures will have a material adverse

effect on our financial condition, results of operations or liquidity. In addition, our insurance

premiums have risen and we have taken several actions, including self-insuring certain risks, to

mitigate the expense increase.

 “As of December 31, 2001, we had approximately 232,500 employees (64% of total employees)

employed under a national master agreement and various supplemental agreements with local

unions affiliated with the International Brotherhood of Teamsters ("Teamsters"). These

agreements run through July 31, 2002. The majority of our pilots are employed under a collective

bargaining agreement with the Independent Pilots Association, which becomes amendable

January 1, 2004. Our airline mechanics are covered by a collective bargaining agreement with

Teamsters Local 2727, which became amendable on August 1, 2001. Members of Teamsters 2727

recently voted down a proposed new contract, and negotiations resumed in April 2002 with the

assistance of the National Mediation Board. In addition, the majority of our ground mechanics who

are not employed under agreements with the Teamsters are employed under collective bargaining

agreements with the International Association of Machinists and Aerospace Workers. These

agreements have various expiration dates between July 31, 2002 and May 31, 2003.

 “We entered into negotiations with the Teamsters in January 2002 for a new national master

agreement. It is our desire through these discussions to reach an agreement on a new contract

prior to the end of our current five-year agreement on July 31, 2002. Any strike, work stoppage or

slowdown that results from our failure to reach a timely agreement with the Teamsters, and any

change in shipping behavior by our customers or potential customers due to perceptions that we

will not reach a timely agreement with the Teamsters, could have a material adverse effect on our

financial condition and results of operations. We do not, however, anticipate that this will occur.

 “We believe that funds from operations and borrowing programs will provide adequate

sources of liquidity and capital resources to meet our expected long-term needs for the operation

of our business, including anticipated capital expenditures such as commitments for aircraft

purchases, through 2009.” 

• Postal Service discussion of changes in revenue:

“Revenue: Revenue of $15.3 billion was 4.9 percent ($796 million) below plan and 2.0 percent

($322 million) below Quarter III of last year. Planned revenue growth for Quarter III was 3.1

percent.

 “Volume in Quarter III was 2.5 percent below last year. We processed and delivered 47.1 billion

pieces as compared to 48.3 billion pieces last year. Revenue loss from the volume decline of 1.2

billion pieces was offset through expense reductions.”
9 GAO-03-26R Postal Financial Reporting

• UPS excerpts of changes in revenue:

UPS reports its operations in three segments: U.S. domestic package operations,

international package operations, and nonpackage operations, as well as on a

consolidated basis. Although the entire revenue discussion is included in

enclosure III, for brevity purposes, only the U.S. domestic package revenue

discussion is presented here, as follows:

“U.S. domestic package revenue decreased 1.2% compared to last year. This decline was driven by

a 1.5% reduction in average daily package volume which was primarily a result of the continued

weakness in the U.S. economy. Revenue for our Next Day Air products was also adversely affected

by a decline in revenue per piece. The decline results in part from lower package weights

combined with a mix shift favoring letters to packages. This reflected what we believe to be

continued slowness in the manufacturing sector. Conversely, revenue for our Ground products

increased slightly due to a 3.5% increase in average revenue per piece. This improvement resulted

in part from having a rate increase that occurred four weeks earlier than compared to the prior

year.

“On January 7, 2002, we increased rates for standard ground shipments an average of 3.5% for

commercial deliveries. The ground residential charge increased $0.05 to $1.10 over the commercial

ground rate, and this charge will also be applied to express deliveries in 2002. The additional

delivery area surcharge, which is added to ground deliveries in certain less accessible areas,

remained at $1.50. In addition, in 2002, this charge will also be applied to express deliveries to

these addresses. Rates for UPS Hundredweight increased 5.9%.

“We also increased rates for UPS Next Day Air, UPS Next Day Air Saver, UPS 2nd Day Air, and 3

Day Select an average of 4.0%. The surcharge for UPS Next Day Air Early A.M. increased from

$27.50 to $28.50. Rates for international shipments originating in the United States (Worldwide

Express, Worldwide Express Plus, UPS Worldwide Expedited and UPS International Standard

service) increased an average of 3.9%. Rate changes for shipments originating outside the U.S.

were made throughout the past year and varied by geographic market.

“An index-based fuel surcharge, which became effective December 10, 2001, continued and resets

on a monthly basis beginning in February 2002. The index-based surcharge is based on the

National U.S. Average On-Highway Diesel Fuel Prices as reported by the U.S. Department of

Energy.”

• FedEx discussion of changes in revenue:

FedEx also reports its operations on a consolidated basis and for its major

business segments: FedEx Express, FedEx Ground, FedEx Freight, and other

Operations. See enclosure II for the complete tables and discussion in each of

these areas.

As these examples indicate, the level of explanations in the FedEx and UPS quarterly

MD&A sections is significantly greater than that provided by the Service and helps

provide the reader with a better understanding not only of what has changed, but why.

In comparing the quarterly reports, we developed the following questions that we believe

would provide meaningful information for the Service to include in its quarterly report in

order to make it a more useful document to its stakeholders:

• Information regarding the current reporting period:
10 GAO-03-26R Postal Financial Reporting

• What were the major changes in revenue, expense, and volume and the

causes of these changes? How do these results compare with the prior

period’s?

• What major challenges or risks did the Service face during the period, and

what was done to respond to them?

• What were the financial consequences of these occurrences?

• Information regarding the upcoming reporting period:

• What challenges are expected, by business line? How will they be

overcome?

• What are the financial expectations of the Service as a whole and on a

business line basis?

• What impact will competitors have in the upcoming period?

• What significant trends, events, commitments, or uncertainties may affect

the Service’s expectations?

• What are the expected cash requirements and year-end cash position?

• What are the expected capital commitments and outlays?

• What is the expected net income, and what actions may be taken to

address specific situations or conditions? Specifically, focus on the causes

of any losses and specific plans to correct them, if known.

• By major business line, what are the major challenges faced,

accomplishments, and plans to generate revenue, reduce costs, and pay

down the debt with the U.S. Treasury?

• Information regarding long-term outlook

• What are the capital expansion plans, projects, time periods, amounts, and

return on investment? What are current projects, their status, and planned

projects? How will these projects be funded and implemented? How will

changing economic factors affect these plans? What risk analysis and

contingency plans have been developed? What are the changes to the

previously reported plans?

• What are the plans to remain within the present debt limit and plans to pay

off long-term debt?

• How is the Service prepared to meet its long-term obligations, such as

funding postretirement health care costs?

While not all of these issues would necessarily be included in every report, they do

represent items that should be considered for disclosure each quarter, giving special

consideration to changes that have occurred since the annual report was issued. In

addition, some of these disclosures would most appropriately be made in the footnotes

accompanying the quarterly financial statements, as are discussed in more detail below.
11 GAO-03-26R Postal Financial Reporting

Financial Statement Footnotes

The Service’s most recent quarterly report provided financial statements that were

generally comparable to those provided by FedEx and UPS in that they included the

basic statements of income, balance sheet, and cash flow. However, unlike the Service,

FedEx and UPS provided notes to the quarterly financial statements that included

explanations on a variety of issues, including changes in accounting policies, business

segment information, major new commitments and contingencies, and supplemental

cash flow information. The SEC guidance for the content of interim financial statements

states, in part, that

“... disclosure shall be provided where events subsequent to the end of the most recent fiscal year

have occurred which have a material impact on the registrant. Disclosures should encompass, for

example, significant changes since the end of the most recently completed fiscal year in such

items as: accounting principles and practices; estimates inherent in the preparation of financial

statements; status of long-term contracts; capitalization including significant new borrowings or

modification of existing financing arrangements; and the reporting entity resulting from business

combinations or dispositions. Notwithstanding the above, where material contingencies exist,

disclosure of such matters shall be provided even though a significant change since year end may

not have occurred...”15

These footnote explanations can greatly enhance the reader’s understanding of the

quarterly financial statements. For example, in their quarterly reports, FedEx and UPS

each discuss in detail contingent losses due to pending lawsuits, whereas the Service

does not present similar information on contingent losses, even though such

contingencies exist.16

Another area where footnote disclosures would be helpful to the understanding of the

Service’s quarterly reports is a more detailed breakdown of certain key line items in the

financial statements. For example, the Service includes in its income statement a single

line item for “revenues,” with no further breakdown provided. UPS also reports a single

line item for revenue in its income statement, but then provides breakdowns of revenue

for each of its reporting segments, including comparative numbers for the prior quarter.

Similarly, details of financial statement line items for “other expenses” and “other assets”

are provided in UPS footnotes, which would also be helpful for the Service. “Other

liabilities” is also a significant line item on the Service’s balance sheet at $41.8 billion, out

of $63 billion in total liabilities. Within this number is approximately $30 billion related

to deferred pension liabilities that warrant explanation in the footnotes, as well as other

liabilities related to employee benefits that are included in this line item. Further, we

have recommended that the Service disclose the amount of postretirement health

benefits earned by postal employees and retirees in notes to its financial statements to

provide more complete information about these significant obligations.17 In our

 

15See 17 C.F.R. §210.10-01(a)(5)(2002).

16A general discussion in the footnotes to the U.S. Postal Service Annual Report 2001 discloses contingent

liabilities.

17In May 1992, we recommended that the Service provide additional information on its postretirement

health benefits as part of its annual financial statement (U.S. General Accounting Office, Financial

Reporting: Accounting for the Postal Service’s Postretirement Health Care Costs, GAO/AFMD-92-32,

Washington, D.C.: May 20, 1992). The Service did not agree with and did not implement this
12 GAO-03-26R Postal Financial Reporting

September 2002 report, we stated that the Service should reassess its accounting

treatment for both its pension and postretirement health obligations and reiterated our

previous recommendation that the Service should fully disclose its postretirement health

obligations because they represent a very material commitment that affects the future

viability of the Service.

An additional useful footnote disclosure for the recent quarterly report would have been

a discussion of the $675 million in supplemental funds appropriated to the Service during

fiscal year 2002 to deal with expenses relating to the terrorist attacks of September 11

and subsequent anthrax attacks.18 These funds are significant because the Service, as an

entity that is substantially self-financing, generally receives only a small annual

appropriation. For example, in fiscal year 2002, the Service was appropriated only about

$77 million in its general fiscal year appropriation.19 Further, disclosure of the

approximately $4 billion projected to be needed over the next 5 years for improving the

Service’s mail processing systems to protect postal employees and the general public

from future attacks through the mail would have informed the reader of the potentially

material effect these expenses may have on the Service’s financial results in the future.20

Consideration of the level of detail included in FedEx’s and UPS’s quarterly reports, as

well as that of other organizations’ reports, may be helpful to the Service as it makes

enhancements to future quarterly reports. We recognize that judgments must be made

about the level of detail that should be provided in quarterly financial reports and that

not all quarterly reports will be the same. However, it is clear from recently publicized

problems in financial reporting that more detailed information and transparency are

called for by both Congress and the public. Such transparency is critical for the Service

because of the importance of its financial situation and the implications for stakeholders

in making their own financial plans. These factors help support stakeholders’ need for

timely, accurate, and complete financial information that is provided on a consistent

basis.

The Service’s Quarterly Financial Reports Lacked Consistent Format and Adequate

Availability to the Public

The first quarterly report that the Service posted to its Web site for the third quarter of

fiscal year 2001 was a good starting point for providing information to Congress and the

public. However, changes in subsequent quarterly reports and their limited availability

made it difficult to make comparisons and analyze trends. Table 1 shows quarterly

financial information provided since our recommendation.

 

recommendation. We reiterated this recommendation and also discussed the accounting treatment of

these obligations in our recent report, U.S. General Accounting Office, U.S. Postal Service: Accounting for

Postretirement Benefits, GAO-02-916R (Washington, D.C.: Sept. 12, 2002). 18On November 20, 2001, the President released $175 million to the Postal Service from the Emergency

Response Fund for expenses relating to the terrorist attacks. In January 2002, the Service was

appropriated an additional $500 million for emergency expenses.

19Public Law 107-67. 20Public Law 107-117 appropriated $500 million to the Service for emergency expenses and required the

Service to develop an Emergency Preparedness Plan with its planned expenditures to support this Plan.
13 GAO-03-26R Postal Financial Reporting

Table 1: The Service’s Quarterly Financial Reports from Third Quarter Fiscal Year 2001

through Third Quarter Fiscal Year 2002

Fiscal quarter The Service’s actions

Third quarter, FY 2001 Posted quarterly report to its Web site

Fourth quarter, FY 2001 Annual report, no quarterly report available

First quarter, FY 2002 Posted slide presentation to its Web site

Second quarter, FY 2002 Posted slide presentation to its Web site

Third quarter, FY 2002 Posted quarterly report to its Web site

Source: U.S. Postal Service.

The Service stated that its audited fiscal year 2001 annual report would serve as its

fourth quarter report, which is a common reporting practice for publicly traded

companies under SEC’s rules. Although neither FedEx nor UPS are required to submit

fourth quarter reports to the SEC, they do issue press releases on their Web sites that

include detailed fourth quarter financial information, such as income statement and

balance sheet information, and a discussion of quarterly results. The Service

occasionally releases financial information via press releases; however, no press release

was provided that included financial results for the fourth quarter of fiscal year 2001.

Utilizing press releases to discuss fourth quarter results would compensate for the time

lapses between the release of its third quarter report and its annual report, thus

providing stakeholders with more timely financial information.

Another concern we raised was that the format for quarterly reports was not consistent,

so that it was difficult to compare results and analyze trends over time. For the first

quarter of fiscal year 2002, the Service changed its reporting format from what was

provided in its first publicly available quarterly report for the third quarter of fiscal year

2001. The Service used the Chief Financial Officer’s (CFO) first quarter slide

presentation to the Board of Governors as its quarterly financial report and stated that it

was posted on its Web site. In spring of 2001, the Service stated that for future quarterly

reports these slide presentations would be used. The Service then posted the CFO’s slide

presentation for the second quarter of fiscal year 2002 to its Web site. We testified in

May of 2002 that the CFO’s slide presentations contained less information than the fiscal

year 2001 third quarter report.21 The slide presentations included summary information

on total revenues, expenses, and work-hour information, but did not include any

discussion of the Service’s current position and outlook. For the third quarter of fiscal

year 2002, the Service posted to its Web site a quarterly report that was similar to its

third quarter report for fiscal year 2001.

Finally, we raised a concern that the Service’s financial reports were not readily available

to the public. Although the Service has begun to post both its monthly and quarterly

reports to its Web site, it only posted the two most recent monthly reports and the latest

quarterly report. In comparison, FedEx and UPS make available not only their most

recent report, but also past quarterly reports. For example, FedEx’s quarterly reports

dating back to April 1998 and UPS’s quarterly reports dating back to May 2000 are

currently available on their Web sites. Posting past monthly and quarterly reports to the

Service’s Web site would improve accessibility to past financial information and would

 

21GAO-02-694T.
14 GAO-03-26R Postal Financial Reporting

assist stakeholders in understanding the Service’s changing financial condition and allow

for trend analysis and comparisons. 

Agency Comments and Our Evaluation

The Service provided comments on a draft of this report in a letter from the Chief

Financial Officer dated October 17, 2002. These comments are summarized below and

reproduced in enclosure IV. In commenting on our draft report, the CFO stated that the

Service would provide additional information in its periodic financial reports to improve

stakeholder understanding of its business and that it would retain the data placed on its

Web site for 3 years. Specifically, the Service agreed to provide explanations about

variances from budgeted amounts, financial expectations, and the projected financial

and operational impact of material events or transactions.

The CFO pointed out that while the Service received many suggestions for fine-tuning

certain disclosures, the financial community expressed overall satisfaction with the

quantity and quality of data the Service provides. The CFO commented that the Service

publicly discloses information to the PRC during rate case filings that exceeds the

amount of information required by SEC-regulated companies and most other government

agencies. We acknowledge that the Service provides a significant amount of information

in its rate case filings; however, this information is provided only for rate-setting

purposes, and rate cases are not filed on a regular cycle. Thus, rate case information

does not provide stakeholders timely information about the Service’s current financial

condition and changes to its expected outlook. As we have reported, stakeholders have

been surprised by the significant changes that have occurred during the fiscal year to the

Service’s net income estimates and financial outlook.

The CFO also stated that our report did not adequately or completely reflect the

Service’s ongoing financial reporting, including its detailed revenue, volume, and weight

information; annual billing determinants data; and 4-week Financial and Operating

Statements. Our report does provide descriptions of the Service’s periodic financial

information, including its quarterly Revenue, Piece, and Weight reports and its monthly

Financial and Operating Statements. As we noted, however, these periodic financial

reports do not clearly explain changes in its financial condition, outlook, and results of

operations, and have not always been readily available to the public. The Service also

provides annual information, such as its Annual Auditor’s Report and annual billing

determinants data, but this information is not available throughout the year for use in

periodic analysis. Moreover, the billing determinants data for fiscal year 2001, which

ended in September 30, 2001, was not released until October of 2002.

With regard to the CFO’s point about the Service’s retirement obligations, he cautioned

that public discussion of retirement obligations must be undertaken with great care and

that the Service would ensure greater public understanding in this area. Due to the

magnitude of these costs, the potential effects on current and future ratepayers, and the

complexity of the issues involved in reporting retirement-related obligations, we agree

that greater public understanding of these obligations is important. The Service’s

announcement regarding its CSRS pension liability at its November 2002 Board of
15 GAO-03-26R Postal Financial Reporting

Governors meeting further emphasizes the importance of enhanced disclosure and

discussion of the implications of all of its retirement-related obligations. Further, the

reduction in future pension obligations would increase the Service’s options for dealing

with its postretirement health obligations and other financial challenges. For these

reasons, we believe that the Service needs to enhance its disclosure of its postretirement

health obligations in its financial reports. Importantly, a number of major employers

have provided disclosures relating to these types of obligations for several years. In

addition, the consolidated financial statements of the U.S. government include extensive

disclosures of these obligations on a government-wide basis. Without sufficient

disclosure of these obligations in the Service’s financial statements or the related

footnotes, neither Congress nor stakeholders can have adequate information needed to

make appropriate decisions related to these issues. We continue to believe that, at a

minimum, these obligations should be discussed in the notes to the financial statements.

- - - - -

We are sending copies of this report to the Chairman and Ranking Minority Member of

the Senate Committee on Governmental Affairs, Chairman and Ranking Minority

Member of the House Committee on Government Reform, the Service’s Postmaster

General/Chief Executive Officer, the Service’s Chief Financial Officer, the Chairman of

the Postal Rate Commission, and other interested parties. We will also make copies

available to others on request. In addition, the report will be available at no charge on the

GAO Web site at http://www.gao.gov.

If you have any questions about this report or the enclosures, please contact Bernard

Ungar at (202) 512-2834, ungarb@gao.gov, or Linda Calbom at (202) 512-8341,

calboml@gao.gov. Key contributors to this assignment were Teresa Anderson, Tida

Barakat, Joshua Bartzen, Heather Dunahoo, and Michael Fischetti.

Bernard L. Ungar

Director, Physical Infrastructure Issues

Linda Calbom

Director, Financial Management and

 Assurance
Enclosure I

16 GAO-03-26R Postal Financial Reporting

Postal Service Fiscal Year 2002 Third Quarter Financial Report
Enclosure I

17 GAO-03-26R Postal Financial Reporting
Enclosure II

18 GAO-03-26R Postal Financial Reporting

FedEx Fiscal Year 2002 Third Quarter Financial Report
Enclosure II

19 GAO-03-26R Postal Financial Reporting
Enclosure II

20 GAO-03-26R Postal Financial Reporting
Enclosure II

21 GAO-03-26R Postal Financial Reporting
Enclosure II

22 GAO-03-26R Postal Financial Reporting
Enclosure II

23 GAO-03-26R Postal Financial Reporting
Enclosure II

24 GAO-03-26R Postal Financial Reporting
Enclosure II

25 GAO-03-26R Postal Financial Reporting
Enclosure II

26 GAO-03-26R Postal Financial Reporting
Enclosure II

27 GAO-03-26R Postal Financial Reporting
Enclosure II

28 GAO-03-26R Postal Financial Reporting
Enclosure II

29 GAO-03-26R Postal Financial Reporting
Enclosure II

30 GAO-03-26R Postal Financial Reporting
Enclosure II

31 GAO-03-26R Postal Financial Reporting
Enclosure II

32 GAO-03-26R Postal Financial Reporting
Enclosure II

33 GAO-03-26R Postal Financial Reporting
Enclosure II

34 GAO-03-26R Postal Financial Reporting
Enclosure II

35 GAO-03-26R Postal Financial Reporting
Enclosure II

36 GAO-03-26R Postal Financial Reporting
Enclosure II

37 GAO-03-26R Postal Financial Reporting
Enclosure II

38 GAO-03-26R Postal Financial Reporting
Enclosure II

39 GAO-03-26R Postal Financial Reporting
Enclosure II

40 GAO-03-26R Postal Financial Reporting
Enclosure II

41 GAO-03-26R Postal Financial Reporting
Enclosure II

42 GAO-03-26R Postal Financial Reporting
Enclosure II

43 GAO-03-26R Postal Financial Reporting
Enclosure II

44 GAO-03-26R Postal Financial Reporting
Enclosure II

45 GAO-03-26R Postal Financial Reporting
Enclosure II

46 GAO-03-26R Postal Financial Reporting
Enclosure II

47 GAO-03-26R Postal Financial Reporting
Enclosure II

48 GAO-03-26R Postal Financial Reporting
Enclosure II

49 GAO-03-26R Postal Financial Reporting
Enclosure II

50 GAO-03-26R Postal Financial Reporting
Enclosure II

51 GAO-03-26R Postal Financial Reporting
Enclosure III

52 GAO-03-26R Postal Financial Reporting

United Parcel Service Quarterly Report
Enclosure III

53 GAO-03-26R Postal Financial Reporting
Enclosure III

54 GAO-03-26R Postal Financial Reporting
Enclosure III

55 GAO-03-26R Postal Financial Reporting
Enclosure III

56 GAO-03-26R Postal Financial Reporting
Enclosure III

57 GAO-03-26R Postal Financial Reporting
Enclosure III

58 GAO-03-26R Postal Financial Reporting
Enclosure III

59 GAO-03-26R Postal Financial Reporting
Enclosure III

60 GAO-03-26R Postal Financial Reporting
Enclosure III

61 GAO-03-26R Postal Financial Reporting
Enclosure III

62 GAO-03-26R Postal Financial Reporting
Enclosure III

63 GAO-03-26R Postal Financial Reporting
Enclosure III

64 GAO-03-26R Postal Financial Reporting
Enclosure III

65 GAO-03-26R Postal Financial Reporting
Enclosure III

66 GAO-03-26R Postal Financial Reporting
Enclosure III

67 GAO-03-26R Postal Financial Reporting
Enclosure III

68 GAO-03-26R Postal Financial Reporting
Enclosure III

69 GAO-03-26R Postal Financial Reporting
Enclosure III

70 GAO-03-26R Postal Financial Reporting
Enclosure III

71 GAO-03-26R Postal Financial Reporting
Enclosure IV

72 GAO-03-26R Postal Financial Reporting

Comments from the U.S. Postal Service
Enclosure IV

73 GAO-03-26R Postal Financial Reporting

(543036)